Cashing Out

Client Talking Points

A Time To Cover

Dark and stormy skies are forming and the bulls are beginning to wonder if the party will soon be over for stocks. Brent crude oil ticked up higher this morning past $117.40 a barrel. As we know, higher oil prices can stop #GrowthStabilizing right in its tracks and put us back in the #GrowthSlowing camp. High gas prices put a damper on consumption which puts the brakes on growth. Wouldn’t be a bad idea to start covering Treasury shorts and taking profits on equity positions. With the S&P 500 up 5%+ for the year thus far, it’s easy to understand why a pullback could occur sooner than later.

Asset Allocation

CASH

50%

US EQUITIES

15%

INTL EQUITIES

15%

COMMODITIES

0%

FIXED INCOME

0%

INTL CURRENCIES

20%

Top Long Ideas

Company

Ticker

Sector

Duration

ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

CHART OF THE DAY: Going Global

Going Global

“We have to remember we're in a global economy. The purpose of fiscal stimulus is not simply to sustain activity in our national economies, but to help the global economy as well, and that's why it's so critical that measures in those packages avoid anything that smacks of protectionism."

-Prime Minister Stephen Harper

Next week Keith and I will be taking the show on the road to London. Our top notch sales team has set up a great schedule and we will be engaging with 20+ of the largest investment firms in London. Without a doubt, it will be interesting to get a sense for sentiment, outlook and flows from another continent. At the end of the week, we may even peak our heads into a pub. (If you are a London based fund, we still have a few slots left so email if you want to set up a meeting.)

Canadian Prime Minister Stephen Harper knows a thing or two about free market capitalism. In fact, Harper went so far as to export the head of his central bank, Mark Carney, to England. As the newly anointed Governor of the Bank of England, Carney is already feeling the heat in British Parliament this morning in his first grilling. On the topic of the Bank of England independence, Carney minutes stated:

“There is no question about my independence as governor of the Bank of England. There is a governance structure that has been put in place, there is an absolutely clear structure.”

So, if the politicians of England were looking for a patsy, it would seem, at least for now, Carney is not their man.

The benefit for Carney is that the U.K. appears to be starting to see stabilizing growth, even as the rest of Europe is still struggling. The most recent British data point is December industrial trade production that was up 1.1% from November to December. Certainly that’s not a growth statistic to get overly excited about, but on the back of U.K. home prices that were up 1.3% in January and January services PMI that was reported at 51.5. Meanwhile, the Eurozone in total reported a PMI of 48.6, which signifies contraction.

Not surprisingly, the New York Times has been critical of Prime Minister David Cameron’s decision to get the fiscal house in order as a path to long term sustainable growth. In fact, in a recent article titled, “God Save The British Economy”, Adam Davidson argues that Cameron’s decision to cut government spending to eliminate crowding out of the private sector has hurt the British economy vis-à-vis the American economy.

The funny thing is that in the fourth quarter of 2012 while the British economy shrank -0.3% sequentially, the U.S. economy didn’t fare much better at a -0.1% sequential decline. Meanwhile, the U.K. has been steadily improving its fiscal situation with a debt-to-GDP of 88% versus the U.S. at 107%. Whether you are a Keynesian or not, in the long run we all likely agree that the less government money that is used to service government debt, the better an economy will fare.

While I am on the topic, today is set to be an interesting day in Europe with the beginning of the two day EU summit kicking off in Brussels. Undoubtedly, a key topic will be the recent strength of the Euro, especially versus the Japanese Yen. Perversely as both the Europeans and Japanese actively try to devalue, with both rhetoric and policy, it should be increasingly positive for the U.S. dollar and consumption in the U.S. Consumption, of course, is 70% of the U.S. economy.

In the short run, though, U.S. equities are starting to price in stabilization of economic growth. To us, this looks like a spot to reduce some equity exposure and cover bonds and gold, especially with the SP500 up a quick 5%+ on the year and the VIX at 13.4. Meanwhile, insiders, based on a report out yesterday, are selling at a level of 9.2:1, the highest level since the equity sell off in 2011.

On a company level, I wanted to highlight our short call yesterday on Gulf Port Energy, with the ticker GPOR. Energy is followed by Senior Analyst Kevin Kaiser and put together a very thoughtful presentation of some 60 pages that walks through the history of the company and a sum-of-the-parts valuation. The nut of it all is that we think GPOR is one of the better shorts in energy for the following reasons:

- Sentiment is extremely positive with 15 buys and 1 hold, and the stock is trading at literally a 52-week high;

- Former majority shareholder Wexford Capital has exited their entire position in GPOR;

- Consensus numbers appear too high for this year and next (as evidenced by yesterday’s pre-release);

- GPOR is expensive trading at $94 EV / proven reserves ($/boe) versus the peer group at $16; and

- Our NAV valuation gets us to ~$22 per share versus the current stock price of ~$40.

Obviously, when you make a short call on a stock it raises the ire of some and interest of others. The beautiful thing about being Hedgeye is that we have no banking, trading, or asset management. We get paid to simply generate compelling investment ideas and do great research. A simple enough concept, though a concept not always embodied in the hallowed halls of Wall Street 1.0.

As Sigmund Freud once said:

"Flowers are restful to look at. They have neither emotions nor conflicts."

The Hedgeye research team is many things, but wall flowers they are not. Thankfully, we are also not conflicted.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 7, 2013

As we look at today's setup for the S&P 500, the range is 25 points or 1.33% downside to 1492 and 0.32% upside to 1517.

SECTOR AND GLOBAL PERFORMANCE

BRAZIL – the Bovespa has joined the KOSPI confirming TRADE and TREND duration breakdowns – this, combined with European Indices breaking their immediate-term TRADE lines almost across the board, is new. We respect new.

EUROPE – what would be really interesting is if we saw the EuroStoxx50 snap its intermediate-term TREND line of 2615 support; its hanging on, barely, this morning – but we need to give this one some time. Waiting/watching for headfakes has been key.

ASIAN MARKETS

MIDDLE EAST

The Hedgeye Macro Team

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02/07/13 07:56 AM EST

THE M3: JUNKET OVERSIGHT; PHILIPPINE CASINOS EXCLUSION FROM LAUNDERING LAW

The Macau Metro Monitor, February 7, 2013

GOV'T STRENGTHENS OVERSIGHT OF JUNKETS Macau Daily Times

Secretary Tam said that the government is stepping up its inspection on the gaming industry and imposing stricter examination on the backgrounds of the casino junkets in order to “purify” the industry. “It’s been the government’s established policy to maintain a stable and healthy development of the gaming industry,” Tam said, “should we find any illegal activities in the sector, we won’t turn a blind eye to it, nor take no action against such activities. The junket system has been operating in Macau for many years, during which we have been optimizing the system with all kinds of adjustments, and reinforcing our supervision of the system. Junket operators need to register with the authority and get a license before they can do business here and we’re planning to exercise stricter examination of their registration. The government is reviewing its current practice in this respect in order to have a closer check on their qualifications, particularly whether or not they have criminal records."

CASINOS GET A PASS IN LAUNDERING LAW Inquirer

Philippine casinos were excluded from the amendments passed on stronger money-laundering controls. Senator Teofisto Guingona said casinos and Internet gaming were excluded at the request of the House and of the state regulator Philippine Amusement and Gaming Corp. “(They) excluded casinos from coverage because (House members) warned it would deter investors. That’s the number one reason. And number two, Pagcor,” Guingona said.

The Senate’s passage of the law came five weeks before the opening of Entertainment City, a $4 billion Manila casino complex.

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investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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